The Effect of Corruption on Bidding Behavior in First-Price Auctions.” working paper, U. Torcuato di Tella and U. San Andrés

If the owner of an object sells it through an auction run by an agent of hers, there is scope for corruption. We analyze the effect of a particular form of corruption on bidding behavior in a single-object, private-value sealed-bid auction with risk-neutral bidders. Bidders believe that, with a certain probability, the auctioneer has reached an agreement with one of the bidders by which, after receiving all bids, (i) she will reveal to that bidder all of her rivals ’ bids, and (ii) she will allow that bidder to change her original bid upwards or downwards. In a second-price auction, the possibility of this form of corruption has no effects. In a first price auction, however, honest bidders can become more or less aggressive than they would be without corruption, or their behavior can remain unchanged. We identify sufficient conditions for each of the three possibilities. Finally, we analyze the consequences of this form of corruption on efficiency, bidders’ welfare and expected revenue. Our results are useful as well for the case, unrelated to corruption, where one of the bidders is granted a right of first refusal